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Capstead Mortgage Reports Fourth Quarter 2013 Results

February 3, 2014

Capstead Mortgage Corp. announced financial results for the quarter ended December 31, 2013 . In a release on January 29 , the Company noted that fourth quarter 2013 highlights include: -Generated earnings of $37.0 million or $0.35 per diluted common share -Financing spreads on residential mortgage investments increased 38 basis points to 1.25 percent -Mortgage prepayments declined 33 percent to 17.14 CPR -Book value increased $0.12 to $12.47 per common share -Agency-guaranteed adjustable-rate mortgage ("ARM") portfolio ended the year at $13.48 billion with leverage at 8.52 times long- term investment capital Capstead reported net income of $37.0 million or $0.35 per diluted common share for the quarter ended December 31, 2013 . This compares to net income of $24.7 million or $0.23 per diluted common share for the quarter ended September 30, 2013 . The Company paid a fourth quarter 2013 dividend of $0.31 per common share on January 20 . Fourth Quarter Earnings and Related Discussion Capstead is a self-managed real estate investment trust, or REIT, for federal income tax purposes. The Company earns income from investing in a leveraged portfolio of residential adjustable-rate mortgage pass-through securities, referred to as ARM securities, issued and guaranteed by government-sponsored enterprises, either Fannie Mae or Freddie Mac , or by an agency of the federal government, Ginnie Mae . This strategy of investing in agency- guaranteed ARM securities that reset to more current interest rates within a relatively short period of time positions the Company to benefit from a potential recovery of financing spreads diminished during periods of rising interest rates and can result in smaller fluctuations in portfolio values compared to portfolios containing a significant amount of fixed-rate mortgage securities. For the quarter ended December 31, 2013 , the Company reported net interest margins related to its residential mortgage investments of $43.1 million compared to $30.9 million for the quarter ended September 30, 2013 . Financing spreads on residential mortgage investments averaged 1.25 percent during the fourth quarter of 2013, an increase of 38 basis points from financing spreads earned during the third quarter of 2013. Yields on Capstead's residential mortgage investments averaged 1.74 percent during the fourth quarter of 2013, an increase of 38 basis points from yields reported for the third quarter of 2013 primarily because of a $14.2 million decrease in investment premium amortization charges reflected as portfolio yield adjustments. Investment premium amortization charges were lower for the fourth quarter as a result of a 33 percent decline in average mortgage prepayment rates over third quarter levels to an annualized constant prepayment rate, or CPR, of 17.14 percent. This decline reflects higher prevailing mortgage interest rates which substantially reduced the number of loans backing securities in the portfolio that can be refinanced at lower rates. Interest rates on repurchase arrangements and similar borrowings, adjusted for portfolio financing-related and currently-paying interest rate swap agreements, averaged 0.49 percent during the fourth quarter of 2013, unchanged from borrowing rates incurred during the third quarter of 2013. At December 31, 2013 repurchase arrangements and similar borrowings totaled $12.48 billion , consisting primarily of 30-day borrowings with 22 counterparties at rates averaging 0.38 percent, before consideration of related currently-paying swap agreements. Portfolio financing-related swap agreements held by the Company at year-end totaled $6.70 billion notional amount with average contract expirations of 18 months. These swap agreements consisted of (a) $4.20 billion notional amount of currently-paying swap agreements requiring fixed rate interest payments averaging 0.50 percent for average remaining interest- payment terms of 14 months, and (b) $2.50 billion notional amount of forward-starting swap agreements with average contract expirations of 25 months that will begin requiring fixed rate interest payments averaging 0.50 percent for two-year periods that commence on various dates between January and April 2014 . Variable payments that are received by the Company under portfolio financing-related swap agreements typically are based on one-month LIBOR and offset a significant portion of the interest owed on a like amount of the Company's borrowings under repurchase arrangements. Capstead's long-term investment capital, which consists of common and perpetual preferred stockholders' equity and long-term unsecured borrowings, increased 0.9 percent during the fourth quarter of 2013 to $1.47 billion at year-end reflecting portfolio and hedge instrument pricing increases and current quarter earnings in excess of common dividend distributions. Portfolio leverage (related borrowings divided by long-term investment capital) declined to 8.52 to one at December 31, 2013 compared to 8.68 to one at September 30, 2013 . Operating costs as a percentage of average long-term investment capital totaled 1.07 percent during the fourth quarter of 2013. This compares to 1.08 percent during the third quarter of 2013. For the year operating costs as a percentage of average long-term investment capital totaled 0.89 percent, significantly lower in comparison to the prior year, and believed to be the lowest of the Company's mortgage REIT peers. Book Value per Common Share The Company also noted, nearly all of it's residential mortgage investments and all of its interest rate swap agreements are reflected at fair value on the Company's balance sheet and are therefore included in the calculation of book value per common share. The fair value of these investments is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors. The Company's investment strategy attempts to mitigate these risks by focusing on investments in agency- guaranteed residential mortgage pass-through securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans with interest rates that reset periodically to more current levels. Because of these characteristics, the fair value of Capstead's portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to portfolios containing a significant amount of non-agency and/or fixed-rate mortgage securities. Management Remarks Commenting on current operating and market conditions, Andrew F. Jacobs , President and Chief Executive Officer, said, "Mortgage prepayment rates declined significantly this quarter to levels not seen since early in 2012, resulting in considerably lower investment premium amortization charges. Combined with no change in overall rates for our borrowings under repurchase arrangements, we are pleased to report a 38 basis point improvement in financing spreads on residential mortgage investments and higher quarterly earnings. Given our current expectations for continued favorable mortgage prepayment rates and borrowing costs, we anticipate reporting earnings in 2014 sufficient to pay dividends at or above our 2013 quarterly dividend level. "We believe our performance during 2013 validates our investment strategy of managing a conservatively leveraged portfolio of agency- guaranteed residential ARM securities that can produce attractive risk-adjusted returns over the long term while reducing, but not eliminating, sensitivity to changes in interest rates. Our earnings rebounded nicely in the fourth quarter as higher prevailing mortgage interest rates have led to sharply curtailed mortgage refinancing activity. Further, declines in book value associated with pricing changes caused by higher interest rates have been limited relative to that of companies holding longer duration portfolios. With this performance, Capstead has earned its widely recognized status as the most defensively-positioned residential mortgage REIT from an interest rate and credit risk perspective." Annual Meeting Record Date The date for the Company's annual meeting of stockholders has been set for May 28 . The record date for determining stockholders entitled to notice of and vote at such meeting will be the close of business on March 28 , and the proxy statement and annual report will be mailed to stockholders on or about April 16 . The Company's 2014 common share dividend calendar has been set as follows: Scheduled 2014 Common Share Dividend Dates Quarter Declaration Date Record Date Payable Date First March 13 March 31 April 17 Second June 12 June 30 July 18 Third September 11 September 30 October 20 Fourth December 11 December 31 January 20, 2015 More information: capstead.com ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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